France Economic Outlook

November 21, 2017

Preliminary figures show the economy expanded 0.5% on a quarter-on-quarter basis in Q3, marking the fourth consecutive quarter where quarter-on-quarter growth came in at or exceeded 0.5%. The print suggests that growth is finally on a steady track following a period of volatile readings. Growth in Q3 was buttressed by resilient fixed investment and an acceleration in private consumption, which has benefitted from the labor reforms implemented by the previous president. More importantly, the quarterly figure came as a positive surprise for the government and puts the economy broadly on track to achieve its 1.8% growth objective for this year. This has important implications on estimates for public revenues, spending and the scope of the government’s reform agenda. In late October, the National Assembly approved a 30% flat rate tax on capital gains and scrapped a controversial wealth tax. The wealth tax was cut by 70% and aims to attract investment into the economy. This should benefit growth in fixed investment and business sentiment, the latter of which is currently resting at multi-year high in October, and bodes well for growth prospects in the final quarter of the year.

France Economic Growth

Declining unemployment, strong business confidence and growth in fixed investment should keep the economy to a stronger growth trajectory in the upcoming years. Panelists participating in the Met the why particular Consensus Forecast expect GDP to grow 1.8% in 2018, which is up 0.1 percentage points from last month’s forecast. For 2019, the panel sees growth of 1.6%.

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France Economy Overview

France Economic Overview

France’s economy is the fifth largest in the world and represents around one fifth of the Euro area gross domestic product (GDP). Currently, services are the main contributor to the country’s economy, with over 70% of GDP stemming from this sector. In manufacturing, France is one of the global leaders in the automotive, aerospace and railway sectors as well as in cosmetics and luxury goods. Furthermore, France has a highly educated labor force and the highest number of science graduates per thousand workers in Europe.

In the external sector, France’s closest trading partner is Germany, which accounts for more than 17% of France’s exports and 19% of total imports. France’s primary exports are machinery and transportation equipment, aerospace equipment and plastics, while primary imports include machinery, automobiles and crude oil. Additionally, France is the most visited country in the world, making tourism a prominent sector in the economy.

Compared to its peers, the French economy endured the economic crisis relatively well. Protected, in part, by low reliance on external trade and stable private consumption rates, France’s GDP only contracted in 2009. However, recovery has been rather slow and high unemployment rates, especially among youth, remain a growing concern for policymakers. After the start of the crisis the economy stagnated and the country has had to face several economic challenges. Government tax revenue has dwindled and consumer purchasing power has declined. Policy makers have attempted to modernize the economy; however, this has been a difficult process. The former Sarkozy government became deeply unpopular, partially due to its reform agenda. Nonetheless, with a government budget deficit that is higher than the Euro-area average and low growth forecasts, the current Hollande government faces the challenge of restoring France’s public finances while encouraging economic growth.

Economic History

Following World War II, Charles De Gaulle’s center-left government implemented an economic policy of dirigisme while rebuilding the country. The state took control of certain key industries, including transportation, energy and communications, and set up a planning agency to regulate economic activity. The first national economic development plan, the Monnet Plan, and subsequent plans became a distinctive feature of France’s post-war economic policy. In addition, De Gaulle began the construction of a welfare state in France and established key institutions such as social security and works councils that remain today.

France’s post-war economic strategy proved to be successful and France entered “Les Trente Glorieuses” (“The Glorious Thirty”), a period of accelerated economic growth, experiencing high gains in productivity, GDP and real wages. In 1983, mounting public debt, inflationary pressure, and internal and external imbalances caused the French government to transition from “dirigisme” to enter an era” de la rigueur” or an era of privatization. The government began retreating from direct economic intervention, privatizing some state companies and adopting more market-orientated policies. However, remnants of “dirigisme” can still be found in the French economy today as the government continues to hold large stakes in a range of key sectors.

Throughout this time period, the French government, along with principal trade partner Germany, advocated increased European economic integration. France was a founding member of the European Coal and Steel Community and the European Economic Community, precursor organizations to the European Union. Further, France was one of the first countries to adopt the euro and the French economy remains highly integrated with Europe today.

In recent years, France, similar to many European nations, has experienced stagnating growth and fiscal challenges. Under former President Sarkozy, the country implemented austerity measures to tackle the budget deficit and public debt. However, France’s GDP has remained almost unchanged since 2011 and the unemployment rate remains high. To reinvigorate the French economy, current President Hollande faces the task of cutting public spending while spurring job creation.

Balance of payments

Since 2005, France has maintained a current account deficit, predominantly driven by trade in goods. Yet, in 2013, France’s trade deficit shrank to its lowest level since 2011, although this decrease was mainly caused by the fact that exports fell less rapidly than imports.

Correspondingly, capital inflows have also fluctuated in the past, typically driven by large amounts of Foreign Direct Investment (FDI). France was ranked 11 in the world for incoming FDI in 2011 and has historically been a leading FDI destination. However, FDI experienced a large decline in 2013, contracting 77%. The countries with the largest investments in France are the United States, Germany, Italy and the United Kingdom.

Trade Structure

France is the second-largest exporter in Europe after its largest trading partner Germany. In particular, France consumes large amounts of imported consumer goods, which are less expensive than products “Made in France.” France is also a net importer of oil and remains sensitive to changes in prices.

France is a member of the European Union (EU) and follows a trade policy similar to other member states with a common EU weighted average tariff rate. Furthermore, France and other EU member states have a number of bilateral and regional trade agreements and are members of the World Trade Organization (WTO). France is a relatively open economy; however, some barriers to trade are present. Among goods, many agricultural products are protected at the European level, a policy that France advocated, and French farmers have historically been dependent on government subsidies. France receives large amounts of FDI and investment regulations are generally transparent, although many bureaucratic impediments persist. In contrast, the financial sector is relatively closed, with only a few foreign banks operating in the country.

Exports from France

France exports a wide range of goods and services and has an export-to-GDP ratio close to 30%. France’s highest dollar value goods exports include machinery, aircraft and spacecraft, vehicles, electronic equipment and pharmaceutical products. Additionally, France is one of the world’s largest exporters of farm and agricultural products and is renowned for its wine, spirits and cheeses. The French government provides significant subsidies to this sector and France is the largest exporter of farm products in Europe. Among services, tourism is a key export and France is the most visited country in the world. Other key exported services include business services and transportation.

The majority of France’s exports are to European nations, with only around one-third of all exports going to economies outside Europe. France exports the largest amount of goods and services to Germany, followed by Belgium, Italy, Spain and the United Kingdom. Outside of the European Union, the United States is the largest destination for French exports.

Imports to France

In recent years, France has been a net importer, consuming a large amount of imported goods and services. France’s top imports are machinery, vehicles, crude oil and aircrafts. Among services, the largest imports into France are transportation and travel services.

Similar to exports, the majority of imports are from European countries, which account for 68% of total imports. France’s main import partners are Germany, Belgium, Italy and Spain. Outside of the European Union, France imports the most goods from China . France, as a member of the EU, follows the common EU weighted average tariff rate on selected imports.

Economic Policy

Since the 1980s, the government of France has favored capitalism and market-orientated policies. The government has either partially or fully privatized many national industries, including Air France, France Telecom and Renault, and today France’s leaders remain committed to capitalism. However, the French government still plays a role in certain key national sectors, such as agriculture, and it will intervene in the market to moderate certain social economic inequalities.

Since the economic crisis, the government of France has had to re-evaluate this aspect of its economic policy. Despite recent changes to France’s policies, greater reform may be needed to kick-start the economy. France is ranked 141 out of 144 countries on “hiring and firing practices” according to the World Economic Forum’s Global Competitiveness Report and many critics advocate for labor market reform. Further, France’s housing market is under stress due to high prices and low market activity. Notably, French economic policy decisions are influenced by common European Union policies and targets, as well as France’s membership in supranational organizations such as WTO and the G7.

Fiscal Policy

In recent decades, France, along with many other European countries, has experienced a rise in the size of government and an accumulation of public debt. Since the economic crisis, the government has had to face new economic realities and has used fiscal policy as a tool to stimulate the economy and reduce the budget deficit. Former President Sarkozy implemented austerity measures, principally budget cuts and tax increases, to attempt to reinvigorate the French economy and reduce the country’s budget deficit. However, current President Hollande was elected on a campaign to eliminate the budget deficit through higher taxes on the wealthy while maintaining government spending. After missing deficit targets and with the French economy still experiencing weak growth rates, Hollande had to reevaluate his fiscal policy and in 2014 he pledged to cut government spending by EUR 50 billion over the next three years.

France’s Monetary Policy

The Banque de France is the central bank of France and is responsible for the implementation of France’s monetary policy. Since 1999, France has followed the common monetary policy of the Eurozone set by the European Central Bank (ECB). The primary objective of the ECB’s monetary policy is to maintain price stability within the Eurozone. Today, the Banque de France is linked to the ECB and implements the interest rate policy set by the European System of Central Banks.

The ECB is committed to keeping inflation below, but close to, 2% over the medium term. In order to achieve this goal, the ECB uses a set of monetary policy instruments including setting the key deposit rate and benchmark refinancing rate. Since the recent economic crisis, inflation has fallen below 1%, into the “danger zone”, causing the ECB to take unprecedented monetary policy actions. In 2014, the ECB cut the main refinancing rate to a record low of 0.15% and became the first major central bank to ever adopt a negative deposit rate.

Formerly, unlike the Federal Reserve, the ECB did not typically buy bonds outright. Instead, the ECB used reverse transactions, repurchase agreements or collateralized loans, to manipulate the money supply. However, during the recent sovereign-debt crisis, the ECB purchased bonds issued by feeble Eurozone countries to stimulate liquidity.

France’s Exchange Rate Policy

Since the adoption of the Euro, France’s exchange rate policy has been determined by the ECB. The Eurozone members decided in 1998 to adopt a flexible exchange rate regime, allowing the euro to float freely. By allowing the euro to float, the ECB targets interest rates rather than exchange rates and does not intervene in foreign exchange markets.

The euro is the world’s second largest reserve currency after the US dollar and is used as a peg for several countries outside of the Eurozone. Additionally, the Danish krone and the Lithuanian litas are linked to the euro through the European Exchange Rate Mechanism II.

Since its introduction, the USD/euro exchange rate has floated within a range of 0.90 USD per euro (annual average over period) and 1.47 USD per euro (annual average over period). After reaching its peak in 2008, the euro depreciated amid fears of a potential Eurozone breakup caused by the Greek sovereign debt crisis. While the euro has gained ground since then, uncertainty regarding the evolution of the debt crisis continues to impact the rate.

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The consumer confidence indicator released by the National Institute of Statistics and Economic Studies (INSEE) rose from 110 points in October to 112 points in November, beating market expectations of an increase to 111 points.

The IHS Markit flash composite Purchasing Managers’ Index (PMI) jumped from 57.4 points in October to 60.1 points in November, surprising analysts who had expected the indicator to drop to 57.2 points.

According to the National Institute of Statistics and Economic Studies’ (INSEE) business climate survey on manufacturing activity, the business sentiment index increased from 111 points in October to a ten-year high of 112 points in November.